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Student Loans

Student Loan Interest & Capitalization: What It Is & How It Works

Student Loan Interest and Capitalization - What it Is And How It Works | Your Money Worth Blog

Both the U.S. Federal Government and Private lenders, make money on student loan debt by charging borrowers interest on the loaned funds.

The interest rate alone, though, does not take into account accrued interest that can be capitalized on a student loan and increase profits for the lenders at borrowers’ expense. And, if you are one of the millions of student loan borrowers, this means extra costs for you.

In this post, I breakdown, what student loan interest is, how it accrues on your student loan, who is responsible for it and when, what happens after accrued interest is capitalized and how to avoid capitalization.

Student Loan Interest

The interest rate on your student loan is the amount charged on the loan, expressed as an annual percentage of the loan principal balance. You can determine the annual interest rate for your student loan from your loan promissory note.

Note: The Student Loan Promissory Note: is a legal document you sign, agreeing to repay your loan, accrued interest, and fees to your lender. Terms and conditions related to whether the interest is variable or fixed, how interest is calculated, when interest is charged, capitalization, repayment requirements and deferment options are also included in this document.

Although your loan annual interest rate tells you the amount of interest that will be charged as a percentage, the rate alone does not tell you how it will be charged. That’s where interest accrual comes in.

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Interest Accrual – When It Starts

The first thing to know about interest on your student loan is that:

  • It starts to accrue with the first disbursement transaction on your student loan;
  • It accrues up on a daily basis; and,
  • It never stops accruing until the loan is paid off, discharged, forgiven, canceled or otherwise settled.
Interest Accrual – How It’s Calculated

Next, you’ll need to be aware that the amount of interest that accrues on your loan is determined by the accrual period (in days), the daily interest rate factor, and the outstanding principal balance, as follows:

Interest accrued = daily interest rate factor x accrual period x outstanding principal balance


Daily interest rate factor = annual interest rate/ 100/ 365 days
Accrual period = number of days over which interest will be calculated
Principal balance = the outstanding loan amount owed

As an example, let’s assume a borrower named Zara has a private student loan with a 10% annual interest rate, a current principal balance of $10,000. She recently put her loan in deferment for a 6-month (180-day) period. The amount of interest that will accrue during that time can be calculated using the formula.


The amount of interest that accrues during the 180-day deferment period.


Daily interest rate factor = (10/100) / 365 days = 0.10/365 = 0.000274
Accrual period = 180 days
Principal balance = $10,000


Interest accrued = 0.000274/day x $10,000 x 180 days
= $493.15

For your own student loan, you can use this formula to figure out the amount of interest that will accrue, over any period of time.

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Interest Accrual – Who Pays for What & When

Because student loans aren’t already complicated enough (*insert sarcasm here*), who is responsible for the interest that accrues depends on the stage of your student life loan cycle  and the type of student loan. The next two figures show who is, typically, responsible for the interest that accrues for these loan types:

  • Private Student Loan
  • Federal Unsubsidized Student Loan
  • Federal Perkins Student Loan
  • Federal Unsubsidized Student Loan
  • Federal Plus Student Loan
  • Federal Consolidation Loan
Who Pays Interest Accrued During the In-School, Grace & Deferment Periods

Who Pays Interest and Capitalization on Student Loans In School, Deferment and Grace Periods

Related Article: The Student Loan Life Cycle; What Is It & How It Works

Who Pays Interest Accrued During the Forbearance & Repayment

Who Pays Interest and Capitalization on Student Loans during Frobearance and Repayment

At every stage of the Student Loan Life Cycle, (In-Shool Period, Post Graduation Grace Period, Deferment Period, Forbearance Period or Repayment Period)  the interest that accrues on your loan is either the responsibility of you and your co-signer(s) or the Federal Government.

From the figures you can see that:

  • The Federal government does not pay the interest on all the different types of student loans it offers.
  • The interest accrued on private student loans (including Caribbean Student Loans) is your (the borrower) and any co-signers’, responsibility.
  • When you consolidate your student loans the responsibility for the interest will be determined by the promissory note for the new loan that replaces the older loans.
    • For consolidation done through the Federal government (for Federal student loans only), this may require you to forfeit the grace period and cause your loans to enter repayment, immediately.
    • Note: If you consolidate your student loans (private and/or Federal), with a private lender, the responsibility for the interest accrued will be the responsibility of the borrower(s).

This can be very confusing, I know.

But you need to know this because, as a borrower, even if:

  1. No one explained this to you;
  2. You don’t receive a statement or notice on the interest that accrues;
  3. You don’t pay attention to notices or statement that detail the interest that builds up on your student loan; or,
  4. Your lender doesn’t require you to make payments on your loan interest;

The interest you are responsible for will be included in the balance you owe and what you are expected, and legally required, to repay to your lender.

Note: Check with your student loan promissory note for specific terms and conditions related to accrued interest. The agreement you signed with your student loan lender will determine who is responsible for the accrued interest and under what circumstances.

Another reason this is important to know is because interest accrues and builds up on your student loan, it can be added to your loan principal balance is through the process of capitalization.

Related Article: How I Paid Off $37,000 if Student Loan & Credit Card Debt, & Bought A Home In 5 Years


Capitalization involves the addition of unpaid accrued interest to the principal balance of your student loan. It usually takes place when unpaid accrued interest builds up on your student loan, during the in-school period, or a period of deferment or forbearance. And, even if you might not have been required to make payments during those periods, the interest is still your responsibility.

Capitalization – How it Works

Using the example of Zara’s private student loan, again, let’s assume that at the end of her 180-day deferment period, she never gave much thought to the interest that accrued on her loan and at the end of the deferment period, her lender capitalizes the interest. The capitalization of her loan could be calculated.


New principal balance after capitalization of interest accrued during deferment.


Principal balance at start of deferment = $10,000
Interest accrued during deferment = $493.15

Principal balance after capitalization = Principal balance at start of deferment + Interest accrued during deferment


Principal balance after capitalization = $10,000 + $493.15 = $10,493.15

After the interest is capitalized on Zara’s loan, her new principal balance is almost $500 higher than before the deferment.

Many students are totally unaware (like I was) of the amount of accrued interest building up during these stages of their student loan life cycle, and are surprised when their principal balance at the start of repayment (or after a period of deferment or forbearance) is higher than the original amount borrowed.

Capitalization of the interest accrued is usually the culprit, and from that point forward you will pay a higher amount of interest.

In simple terms, when unpaid accrued interest is capitalized on your student loan, you pay compound interest to your lender, i.e. interest-on-interest.

If you have student loans already, or you are considering relying on some amount for your education, I want you to use this information understand how interest builds up on your loans and avoid capitalization of interest, altogether.

[clickToTweet tweet=”Capitalization means paying interest on interest to your student loan lender” quote=”Capitalization means you pay interest on interest to your lender” theme=”style2″]

Capitalization – How To Avoid it

Although there is nothing you can do about the fact that that interest accrues on your student loan daily, what you can do is prevent any interest that might build up from capitalizing and increasing the cost of the debt to you.

Start by contacting your student loan servicer or lender to find out:

  • What stage of the student loan life cycle your loan is in.
  • Whether there is an outstanding accrued interest balance on your student loan.
  • If there is currently any outstanding interest, and when it is scheduled to be capitalized.
  • What options are available to pay off any outstanding accrued interest balances before it capitalizes.
  • Whether you are currently accumulating accrued interest on your student loan and how you can start making payments towards interest, even if payments are not required.

I hope you found this breakdown useful!

If so, share this post and let me know your thoughts in the comments.

~ Melisa Boutin

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In The Know: 3 Facts About The Obama-Era Student Loan “Protections”

3 Facts About The Obama Era Student Loan Protections You Should KnowAfter news of Secretary of Education, Betsey Devos’ plan to roll back Obama-era student loan protections, Student Loan Attorney, Jay Fleischman said it best, “It’s all ‘borrower-beware.’ It’s on you to find all the information…

And the truth is that this was the case even with the Obama-era protections in place. Student loan borrowers not only need to be well informed about the income-driven repayment plans available to help them avoid default but also need to educate themselves about how their student loan works and how to avoid accumulating excessive debt in the first place.

None of the Obama-era protections –

  • Required in-depth financial education about how student loans work by college financial aid offices & staff or the U.S. Department of Education.
  • Prevented the negative amortization of student loans for income-driven repayment plans.
  • Stopped the rapid rate of new student loan defaults: one every 29 seconds.

What The Obama-Era Protections Didn’t Do

3 Facts About Obama Era Student Loan Protections

Related: The Student Loan Life Cycle: What It Is & How It Works

If you are considering using student loans to pay for college, start informing yourself by:

  1. Understanding your student loan life cycle.
  2. Limiting the amount of debt you take on to your expected starting salary after graduation.
  3. Applying for scholarships year-round to reduce your reliance on student loan debt.
  4. Obtain college credit by examination to reduce education costs.

For those of you who have already borrowed heavily and you are confused by how to navigate repayment, understanding your student loans will be even more important, in addition to making a solid plan to pay off your debt.

No student loan servicer or presidential nominee will do that for you.

~Melisa Boutin


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The Student Loan Life Cycle: What It Is & How It Works

The Student Loan Life Cycle: What It Is And How It WorksI strongly believe that the main reasons borrowers get in trouble with student loans are:

  •  A lack of understanding of how they work.
  • A high level of debt relative to the starting salary after graduation.

In my own case, completed my undergraduate degree program with a much higher than average $58,000 of Federal, private and international student loans.

But, even though I had so many loans, I never really had a good grasp how they really worked. All I knew was that I would borrow money to cover my tuition and related college expenses and that I would pay them back when I got a job after graduation, for at least ten years.

This seemed like a simple enough agreement, at the time, but once I started to repaying my student loans, I found out that student loans were everything but simple.

This is why one of the goals of is to educate parents, prospective and current college students, and graduates, about how student loans work so that they can create a solid strategy to avoid them, minimize taking them out, or pay them off, quickly.

To that end, I’ll explain what the student loan cycle is and how it works.

What Is The Student Loan Life Cycle

The student loan life cycle is the series of stages that student loan progresses through between loan initiation and the final payment.

Typically, a student loan life cycle has these four stages:

  1. The In-School Period;
  2. Post Graduation Grace Period;
  3. The Optional Post Graduation Deferment Period; and,
  4. The Repayment Period.

The Student Loan Cycle | - Pinterest

Once a student loan is initiated, it progresses through the different stages of the life cycle. The length of each stage depends on the enrollment or graduation status of the student. Each stage is described in more detail, next.

The Stages of the Student Loan Life Cycle

Stage 1 – The In-School Period

This stage represents the time a student in enrolled in college. For full-time college student pursuing a bachelor’s degree, this stage is typically 4 years.

Stage 2 – Post-Graduation Grace

Once a student graduates, the student loan enters the post-graduation grace period, which is usually 6 months.

Stage 3 – Optional Post-Grad Deferment or Forbearance

Although and optional, many student loan borrower opt for this addition delay in making payments, after the end of the grace period. The length of this deferment or forbearance period depends on eligibility requirement and time limits established by the lender.

NOTE: Forbearance and deferment provide relief from payments to the borrower. U.S. Federal loans the eligibility and limits for this option can be on the Student Aid Deferment and Forbearance webpage 
Stage 4 – The Repayment Period

This stage represents the period where payments toward principal and interest are required, on a monthly basis until the loan is paid off, discharged, forgiven or settled. The length repayment period will depend on the promissory note’s terms and conditions, and the type of repayment plan selected by the borrower (when different options are available).During each of these stages, the f you have a student loan, you should be aware of which of these stages your student loan is in, and what your

It is important to understand the student loan cycle, because whether a borrower has to make payments to a student loan is dependent on the which stage of the cycle it is in. The sum of the length all of these stages will also determine, the lifetime of a student loan. That is how long the student loan obligation will exist.

The Student Loan Lifetime

To illustrate how the stages of the student loan lifecycle impact the lifetime of a student loan, let’s assume that borrower takes out a student loan to fund a 4-year degree. After graduation, the borrower starts making payments, as scheduled at the end of a 6-month post-graduation grace period and continues for 10-years standard repayment plan. In this case, the lifetime of the loan is 14 years.

Student Loan Life Cycle for Standard Student Loan Repayment Plan

 Your Student Loan LifeCycle

It is important to understand what the life cycle is for your own student and how the length of the different stages can impact its lifetime. When you take out student loans to fund a 4-year degree, for instance, that already represents a more than decade-long financial commitment that can be made even longer, if you:

  • Spend longer than expected in school;
  • Opt to put your loans in deferment or forbearance; or,
  • Choose and extended payment plan, beyond 10 years.

Among other factors (that I will cover in separate posts). I hope you found this post useful. If you did please let me know in the comments below! ~Melisa Boutin
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5 Ways To Manage Student Loans As A Millennial Entrepreneur

5 ways to manage student loans as a millennial entrepreneur

Millennials are now America’s largest generation and stand at the forefront of the rapid growth of student loan debt, In fact, we are collectively carrying $1.3 Trillion in student loan debt, right now. It’s no surprise then, that many new Millennial entrepreneurs have to juggle student loan debt obligations drumming up and scaling a new business idea.

Over on I am sharing, how millennials can manage student loan debt as a new entrepreneur, including:

  1. Understand the types and terms of your student loan debt,
  2. Minimize your personal expenses.
  3. Generate income fast.
  4. Barter for services.
  5. Apply for small business prizes and pitch competitions.

5 Steps to Manage Student Loans As A Millennial Entrepreneur

Want to know how I paid off $37,000 in debt in 5 years while, saving for retirement and buying a home? Learn more about the strategies I used HERE

Read the entire article on the Priceless Planning blog, HERE.


Featured – Personal Finance Contributor to Potent Magazine’s Come Back Issue!

Potent Magazine Article on Caribbean Student Loans by Melisa Boutin

I am so excited to be a personal finance contributor to Potent Magazine’s Come Back Issue!

Potent Magazine is a digital and print magazine that is the authoritative voice on Caribbean culture and its global influence. The Come Back Issue is the first issue available in print and I am so honored to be a contributor!

You can read the digital version of my article ” Caribbean Student Loans Shouldn’t Be This Complicated” where I share about the challenges Caribbean borrowers face when dealing with Caribbean student loan lenders and the systematic changes that are long overdue, here.

You can also order a print copy of the magazine on Potent’s website, too.

Thank you to the Editor in Chief, Genice Phillips,  for creating such a needed publication that highlights the “beauty and power of the Caribbean people”.